Regulation

US FTT faces tough reception in Congress

As a European financial transaction tax (FTT) draws closer, calls for a similar levy in the US have been reignited. But the political will for a US FTT is limited, with industry experts warning a tax would dampen trading volumes and curtail economic growth.

Two Democrat politicians plan to reintroduce a US version of the FTT into Congress in the coming weeks, which would tax equity and bond transactions at 0.03% and derivatives contracts at an as-yet unspecified rate of notional value. Primary offerings of equities and bonds would be exempt and the latest iteration will also include some exemptions for pension and education savings.

The pair behind the bill, senator Tom Harkin and congressman Peter DeFazio first introduced it in November 2011, calling for a levy on Wall Street in the wake of the financial crisis, but experts have warned the plan would stymie equity volumes and wider economic growth.

Payson Peabody, managing director and tax counsel for US finance industry trade body the Securities Industry and Financial Markets Association (SIFMA), believes one stated aim of the tax – to reduce transactions seeking to profit from small margins, such as high-frequency trading (HFT) – would reduce liquidity for all market participants and stunt economic growth.

"The likelihood of Congress passing an FTT is very slim at this point in time as most policymakers realise that this type of tax would be eventually be passed on to end-investors, thereby discouraging investment and hurting retirement savings," Peabody said.

Peabody's comments were echoed by Matt Samelson, a principal at capital markets consultancy Woodbine Associates.

"No one can really predict the effect a transaction tax would have on the market, but it appears it would hit high-frequency traders most, which would widen spreads and have an adverse effect on liquidity," Samelson said, adding that there was already a tax on US equities under the Securities and Exchange Commission fee, a one-eighth of a basis point levy – or 0.0000125% of notional value.

Samelson added the global nature of many modern markets would raise questions over the scope of the tax.

"If regulation is not aligned across regions and there are questions of applicability it can drive liquidity away from certain areas through regulatory arbitrage, which policymakers here will be acutely aware of," he said.

Extraterritoriality concerns voiced by a litany of market participants over Europe's proposed FTT will also grow if a US FTT is formed, argues Peabody. Under its current wording the European FTT hits any market participant trading anywhere in the world if they are 'established' in one of the 11 EU member states that have signed up to the tax, or trade stocks listed in one of those countries.

The European FTT proposal - supported by major European economies including France and Germany, but not the UK – imposes a 1% charge on equity and bond transactions and 0.01% fee on notional value of derivatives trades.

France, Italy, Spain and Portugal have also formed a vanguard and have developed – or are developing - their own FTTs ahead of the Europe-wide plans.

"It’s quite common for regulators to cooperate across borders but there are well-established, agreed on principles in the tax world that impose limits on the ability of any country to tax transactions outside its borders and the European FTT appears to have been designed expressly to avoid such limits," SIFMA's Peabody said.

Politically, the task facing the two Democrats will be tough, as US treasury secretary Timothy Geithner has already said the administration opposes such a levy.

However, the Harkin-DeFazio plan - known formally as the Wall Street Trading and Speculators Tax - emphasises the need for a shift in the tax structure for Wall Street's major players in light of the financial crisis and the Congress Joint Tax Committee, which reviews all tax-related proposals, has stated a FTT would net US$352 billion over ten years.

Richard Henderson +1 212 217 6916 richard.henderson@information-partners.com